Financial Risk Management tools and techniques

Nowadays, businesses’ world takes several risks. One of the most notable is the Financial Risk. This is the possibility of losses within a business, primarly credit risks. This risk is related to various sources, from customers, to interest rates. Luckily, the increase of technology and the improvement of this area allows companies to deal with risk. There are different tools and techniques that organisations can use to avoid the loss of incomes. Do you want to know more? Keep reading?

Financial Risk Management

Firstly, it is important to understand what is FRM or Financial Risk Management and its implications in the business field worldwide. This concept refers to the combination of strategies carried out by a professional to avoid Financial Risks. Thus, the company can improve their goals and have an increase of the profits.

Nevertheless, the company’s staff must be part of this strategy for it to work. Moreover, the directors should know what risks exist in the market and how far are they willing to go. This way, the risk manager can develop an action plan according to the organisation’s needs and the objectives of that movement.

The field of Risk Management has increased in the last years, especially with the development of the world of Finances. Politics have a strong influence in the markets and companies must deal with it. They should prepare themselves to deal with the risks that might come. Some of the examples are the possible exit of the UK from the UE or the presidency of Trump.

In these cases, the Risk Manager must, as mentioned before, analyse the company’s situation and create a action plan. It is necessary that the staff takes part on this plan. Therefore, they will be aware of the decisions they can or cannot make and who has the responsibility of the mistakes that might arise.

As you can see, these professionals are highly demanded in the area of Finances and universities are creating programmes to include this discipline and form students. Thus, they will be capable of dealing with the demands of the job market and to become experts in risk management.

What should I do now?

Every professional has their own tools. And risk managers will not be less. In order to deal with the expectations of the company and to assure the success of their job, they need some resources. The managers implement the strategies to avoid the red zone of the risk. There are several phases in the Risk Management:

First, the manager must associate the risk and to identify it. Then, the professional must assess the risk to know the scale of it. Several methods allow them to prioritize the risk against a matrix to see the likeliness and the impact. Companies must look at the assessment and come up with an action plan. Finally, they must implement the plan and monitor the performance.

Which strategy should I choose?

With the large number of methods available it can be confusing for some professionals to choose the right method for the company. Here you have some strategies or tools that a Risk Manager might choose to fulfill the job:

Internal strategies

These are strategies in which the company accepts the risk and decide to manage it internally. This means, in the framework of normal business operations. Some of these strategies are called natural hedging and internal netting. Natural hedging tools are those created to manage foreign exchange and interest rate risks. On the other hand, internal netting is for managing multiple internal exposures across a range of currencies.

Risk-sharing strategies

The manager uses these strategies to mitigate or share risks with an outside party. Thus, the responsibility of the company decreases. The two most common tools are forwards and joint ventures. First, a forward is a contract for a future delivery of an asset or at a specific fixed price. This would prevent any losses from an unfavorable currency movement. On the other hand, joint ventures are a contract that implies that one part agrees to deal with a certain level of risk but with the option of sharing it with another party. This helps companies to get into a new market.

Therefore, the possibilities are numerous and it is the task of the risk manager to decide what strategy suits best for the company. If you want to form yourself in the world of Risk Management, you can’t miss our Master in Financial Risk Management. Contact us for more information!